Treasury clears way for $700B bailout to begin

October 28, 2008 5:21:21 AM PDT

By MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON - October 28, 2008 --

The government has cleared the way to ship out $125 billion this week to the country's largest banks, beginning the biggest government bailout in history. "The money will go out the door for those institutions early this week," predicts Assistant Treasury Secretary David Nason, one of the chief architects of the rescue plan.

Not only is the money ready to be sent to nine major financial institutions, including Bank of America, Citigroup Inc. and JPMorgan Chase, but the government is reaching preliminary agreements with a group of more than a dozen major regional banks, who will share a part of an additional $125 billion the government hopes to pump into the banking system.

Before the end of the year, Treasury Secretary Henry Paulson intends to have spent $250 billion of the $700 billion bailout package buying ownership stakes in U.S. banks. The goal is to improve their balance sheets so that they will resume more normal lending practices and prevent the country from sliding into a deep recession.

Another $100 billion is earmarked to be spent buying troubled assets from banks such as bad mortgage loans as another way to spur banks to resume lending.

However, a long line of other industries are hoping the government will decide to help them as well. Insurance companies, automakers, hedge funds and foreign-owned banks are all making appeals to be included in the rescue package, contending that they need assistance as well.

Treasury and White House officials signaled on Monday that their cases are being reviewed. That review is coming in the closing days of a heated election campaign when the country will be electing a new president and a new Congress for next year.

The beleaguered auto industry is making its appeals to both presidential candidates and lawmakers running for re-election and their are indications those pleas are being heard.

Presidential press secretary Dana Perino told reporters Monday that officials at the "highest levels" of the Treasury, Energy and Commerce departments have listened to automakers make their cases. She said the administration is "working as quickly as we possibly can" to finalize the rules needed for automakers to start tapping a $25 billion loan fund that Congress approved last month.

The fund is designed to help automakers develop new energy-efficient technology but is seen as a way to help keep the companies afloat during hard times. The expectation is that an initial $5 billion could be freed up soon.

Perino said Treasury was also trying to determine whether the financing arms of the automakers might be eligible for federal help under the bank stock-purchasing program of the rescue package.

The rescue program is just one of the efforts the government is making to combat the worst financial crisis to hit the country since the 1930s. The Federal Reserve began a program Monday to purchase the short-term debt of businesses, known as commercial paper. This market has been frozen since the collapse of Lehman Brothers spooked credit markets last month.

Fed officials were also scheduled to begin a two-day meeting on interest rates on Tuesday with economists widely forecasting that the Fed will cut a key interest, the federal funds rate, to 1 percent in an effort to boost borrowing demand as a way to deal with the economy's current troubles.

So far, the efforts to battle the severe credit squeeze have shown little in the way of results. Libor, the London Interbank Offered Rate, a key goalpost for international lending, edged down only marginally on Monday and still remains at elevated levels.

"All these efforts are doing some good, but the question is whether they will do enough," said David Wyss, chief economist for Standard & Poor's in New York. "The credit markets are still pretty locked up."

Stocks tumbled again on Wall Street Monday. The Dow Jones industrials finished the day down 203 points, or 2.4 percent, closing at 8,176, the lowest close of the year. Remarkably, it was the 28th time in the 31 trading sessions since the financial meltdown began in mid-September that the Dow has moved triple digits for the day.

Treasury announced that Paulson, who is the administration's point person on the bailout effort, will not make a scheduled speech to Wall Street executives on Tuesday, sending an aide in his place, so that he could remain in Washington to work on the details of the rescue program.

That program has undergone a major change in emphasis since it was passed by Congress. After global markets imploded, forcing other countries to rush to the aid of their banks, Paulson decided that it was urgent to get assistance to U.S. banks more quickly. As a result, he earmarked $250 billion for the stock purchase plan and only $100 billion for what had originally been the centerpiece of the proposal, the purchase of troubled bank assets.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire troubled banks. That has prompted criticism the government could be getting into the position of picking winners and losers.

Karen Thomas, the executive vice president for the Independent Community Bankers of America, which represents the country's 8,000 smaller banks, said her group supported efforts to consolidate troubled banks with stronger ones but did not believe it was proper to pick winners among healthy banks.

"We believe that government money should not be used to facilitate consolidation of healthy institutions," she said.